Section 3 - Agreements and joint elections: Great Britain

54.     Subsection (1) provides for the following amendments to Schedule 1 to the CBA 1992.

55.     Subsection (2) extends the scope of paragraph 3A of Schedule 1 to the CBA 1992 in relation to agreements entered into between employers and their employees. These allow employers to recover secondary Class 1 National Insurance contributions from their employees in respect of post-acquisition income from both restricted and convertible securities. Subsection (2) also inserts sub-paragraph (2A) which introduces a condition to the use of agreements; namely, that such agreements may not be used in respect of relevant employment income if the market value of the securities from which that income derives has been artificially depressed.

56.     The term "artificially depressed market value" is used in the title of Chapter 3A of Part 7 of ITEPA 2003 (as substituted by Schedule 22 to the Finance Act 2003). That Chapter applies in certain cases where the market value of employment-related securities (or other relevant securities or interests in securities) is reduced by things done otherwise than for genuine commercial purposes. The following are among the things that are, for the purposes of Chapter 3A of Part 7 of ITEPA 2003, done otherwise than for genuine commercial purposes:

• anything done as part of a scheme or arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax or National Insurance contributions; and

• any transaction between companies which are members of the same group on terms which are not such as might be expected to be agreed between persons acting at arm's length (other than a payment for group relief).

57.     Subsection (2) also inserts sub-paragraph (2B) (to paragraph 3A of Schedule 1 to the CBA 1992) which defines "relevant employment income" in three ways:

• an amount that counts as employment income of the earner under section 426 of ITEPA (restricted securities: charge on certain post-acquisition events), as amended by Schedule 22 of the Finance Act 2003;

• an amount that counts as employment income of the earner under section 438 of ITEPA (convertible securities: charge on certain post-acquisition events), as amended by Schedule 22 of the Finance Act 2003;

• a gain that is treated as remuneration derived from the earner's employment by virtue of section 4(4)(a) of the CBA 1992, as consequentially amended by Schedule 22 of the Finance Act 2003. This section treats as earnings gains from securities options.

58.     Subsection (3) amends paragraph 3B of Schedule 1 to the CBA 1992 in order to extend the joint National Insurance contributions election facility to include relevant employment income that is derived from restricted or convertible securities (by virtue of post-acquisition chargeable events only). Further changes are made to ensure that a joint election may not be used with respect to relevant employment income if the market value of the securities from which that income derives has been artificially depressed. Subsection (3) also provides that a joint National Insurance contributions election in respect of relevant employment income from restricted or convertible securities may not be applied to any contributions in respect of a payment of relevant employment income made before the election is entered into.

59.     Subsection (4) provides that the amendments made by this section will apply to agreements and elections entered into after the date of commencement of this section in respect of relevant employment income which counts as employment income after commencement of the section.

60.     Subsection (5) defines "post-commencement employment income", for the purposes of subsection (4), as amounts of relevant employment income which, after the date of commencement of this section, count as employment income.

Section 4 - Agreements and joint elections: Northern Ireland

61.     Section 4 replicates the provisions of section 3 in relation to Northern Ireland by amending the equivalent sections of the CB(NI)A 1992.

Administration of National Insurance contributions and Statutory Sick

Pay and Statutory Maternity Pay

Section 5 - Recovery of contributions, etc: Great Britain

62.     Subsection (1) amends section 121A(1)(b) of the SSAA 1992 by substituting a reference to "7 days" for the reference to "30 days". As amended section 121A(1)(b) will provide in England and Wales for distraint action to be conducted where a person has failed to pay the amount due by way of contributions within 7 days of the issue of a certificate under section 118(1) of the SSAA 1992.

63.     Subsection (2) amends section 121B(1) of the SSAA 1992 by substituting a reference to "14 days" for the reference to "30 days". As amended section 121B(1) will provide in Scotland for application for a summary warrant where a person has failed to pay the amount due by way of contributions within 14 days of the issue of certificate under section 118(1) of the SSAA.

64.     Subsection (3) inserts subsection (8A) into section 121C of the SSAA 1992 to provide that all sums due under personal liability notices regarding contribution debts are to be recovered in the same manner as Class 1 contributions - ie. under tax legislation. Section 121C allows the Inland Revenue to make the officers of a company personally liable for contribution debts which have not been paid by the company in cases where they have perpetrated fraud, or been negligent in carrying out their responsibilities.

65.     Subsection (4) inserts new paragraph 7BZA after paragraph 7B of Schedule 1 to the CBA 1992. Paragraph 7BZA is a power to provide, by regulations, for income tax legislation to apply to the recovery of National Insurance contributions which are not collected with tax.

Section 6 - Recovery of contributions, etc: Northern Ireland

66.     Subsection (1) substitutes a new section 115A for section 115A of the SSA(NI)A 1992 to replicate, in relation to Northern Ireland, the provisions of section 121A SSAA 1992 (as amended by subsection (1) of section 5) in relation to England and Wales.

67.     Subsections (2) and (3) replicate respectively the provisions of subsections (3) and (4) of section 5 by amending the equivalent provisions of the SSA(NI)A 1992 and the CB(NI)A 1992.

Section 7 - Class 1, 1A, 1B or 2 contributions: powers to call for documents etc: Great Britain

68.     Section 7 provides for section 110ZA SSAA 1992 to be replaced to:

• remove the existing powers of entry and examination for National Insurance contributions purposes; and

• attach National Insurance contributions to the information powers in section 20 of the TMA1970.

69.     Section 110ZA(1) applies section 20 of the TMA 1970 together with sections 20B and 20BB to National Insurance contribution matters.

70.     Section 110ZA(2) provides alternate readings for various references in those sections so that they make sense in relation to National Insurance contributions.

71.     Section 110ZA(3) limits the scope of the section to certain classes of contributions. Class 3 contributions are voluntary contributions and Class 4 contributions are already attached to all of the provisions of the Taxes Acts by virtue of section 16 of the CBA 1992.

Section 8 - Class 1, 1A, 1B or 2 contributions: powers to call for documents etc: Northern Ireland

72.     Section 8 replicates the provisions of section 7 in relation to Northern Ireland.

Section 9 - Compliance regime for statutory sick pay and statutory maternity pay: Great Britain

73.     Section 9 provides:

• a routine inspection power to allow officers to examine books and records relating to SSP AND SMP; and

• civil penalties for failures to comply with the requirements of the SSP AND SMP schemes and fits those civil penalties into the procedural framework which surrounds civil penalties generally in the Revenue.

74.     Subsections (2) and (3) create regulation making powers to require the records to be maintained and information provided for SSP and SMP purposes.

75.     Subsection (4) removes SSP and SMP from the scope of section 113 of the SSAA (criminal offences).

76.     Subsection (5) inserts a new section 113A which provides civil penalties for a number of different failures:

• failure to produce records;

• failure to keep records;

• failure to provide information; or

• failure to pay SSP or SMP.

77.     The new section 113A (8) applies Schedule 1 to the Employment Act 2002 in relation to the new penalties. That Schedule sets out the penalties procedure and appeals rules.

78.     Subsection (5) also inserts new section 113B which provides for penalties in cases of fraud or negligence. Four circumstances are covered:

• making incorrect statements or declarations;

• producing incorrect documents or records;

• making incorrect payments of SSP or SMP; and

• (an employer) receiving incorrect SMP payments.

79.     New section 113B (4) and (5) applies Schedule 1 to the Employment Act 2002. That Schedule sets out the penalties procedure and appeals rules.

Section 10 - Compliance regime for statutory sick pay and statutory maternity pay: Great Britain

80.     Section 10 replicates the provisions of section 9 in the relation to Northern Ireland.

Schedule 1 - Minor and consequential amendments

81.     Paragraph 1 provides for amendments to the CBA 1992.

82.     Paragraph 1(2) amends section 10A(4) of the CBA 1992 to reflect the renumbering of the provisions in sections 6 and 10 of the CBA 1992 by paragraph 2 of Schedule 9 to the Welfare Reform and Pensions Act 1999 and section 74 of the Child Support, Pensions and Social Security Act 2000 respectively. Section 10A of the CBA 1992 deals with Class 1B contributions.

83.     Paragraph 1(3) amends section 18 of the CBA 1992. Section 18 deals with special Class 4 contributions payable by people who are treated as self-employed for contributions purposes but who are not taxed under Schedule D. The amendment inserts a reference to the new paragraph 7BZA of Schedule 1 to the CBA 1992 (inserted by section 5(4)) alongside the existing reference to paragraph 6 to that Schedule to prevent duplication of provision to apply tax legislation to the recovery of Class 4 contributions.

84.     Paragraph 2 makes equivalent amendments to the CB(NI)A 1992 in respect of Northern Ireland.

85.     Paragraph 3 provides for amendments to the SSAA 1992.

86.     Paragraph 3(2) amends section 111 (3) of the SSAA 1992 to reflect the fact that the new section 110ZA (inserted by section 7) does not provide powers of itself but extends section 20 of the TMA 1970. This prevents a breach of section 20 in relation to National Insurance contributions becoming a criminal offence by virtue of section 111(1). Breaches of section 20 are dealt with by way of civil penalties under other provisions of the TMA 1970.

87.     Paragraph 3(3):

• removes part of section 162 of the SSAA 1992 which relates to penalties for breaches of the old section 110ZA (sub-paragraphs (a) and (b)); and

• amends section 162(4A) of the SSAA 1992 by inserting a reference to the new paragraph 7BZA of Schedule 1 to the CBA 1992 (inserted by section 5(4)) to provide that any interest or penalties on late paid contributions recovered under the new powers are paid into the National Insurance Fund.

88.     Paragraph 4 makes equivalent amendments to the SS(NI)A 1992 in respect of Northern Ireland.

89.     Paragraph 5 amends section 4 of the ToFA 1999. Section 4 of, and Schedule 4 to, the ToFA 1999 provide the legislative framework for the recovery through the courts of National Insurance contributions which are not collected with tax. The amendments at sub-paragraphs (2) and (4) have the effect of disapplying the provisions of Schedule 4 to the ToFA 1999 in relation to the recovery of contributions to which tax provisions apply by virtue of regulations made under paragraph 7BZA of Schedule 1 to the CBA 1992 or the CB(NI)A 1992 (inserted by section 5(4) and 6(3)). The amendment at paragraph (3) disapplies the provisions of Schedule 4 to the ToFA in relation to Class 4 contributions payable by virtue of section 18 of the CBA 1992 which are to be recovered under tax legislation.

COMMENCEMENT

90.     Except for sections 13, 14 and 15 (Commencement, Extent and the Short Title) which came into force on Royal Assent, the provisions of the Act will be brought into force by commencement order.

HANSARD REFERENCES

91.     The following table sets out the dates and Hansard references for each stage of this Act's passage through Parliament.

ROYAL ASSENT - 13 May 2004      House of Lords Hansard Vol 661 Col 506

                         House of Commons Hansard Vol 421 Col 536                                                   Annex A

Section 420 of the Income Tax (Earnings and Pensions) Act 2003 (as substituted by Schedule 22 to the Finance Act 2003)

Interpretation of Chapters 1 to 5

420 Meaning of "securities" etc

(1) Subject to subsections (5) and (6), for the purposes of this Chapter and Chapters 2 to 5 the following are "securities"-

(a) shares in any body corporate (wherever incorporated) or in any unincorporated body constituted under the law of a country or territory outside the United Kingdom,

(b) debentures, debenture stock, loan stock, bonds, certificates of deposit and other instruments creating or acknowledging indebtedness,

(c) warrants and other instruments entitling their holders to subscribe for securities (whether or not in existence or identifiable),

(d) certificates and other instruments conferring rights in respect of securities held by persons other than the persons on whom the rights are conferred and the transfer of which may be effected without the consent of those persons,

(e) units in a collective investment scheme,

(f) futures, and

(g) rights under contracts for differences or contracts similar to contracts for differences.

(2) In subsection (1)(e) "collective investment scheme" means arrangements-

(a) which are made with respect to property of any description, including money, and

(b) the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.

(3) In subsection (1)(f) "futures" means rights under a contract for the sale of a commodity or other property under which delivery is to be made at a future date at a price agreed when the contract is made; and for this purpose a price is to be taken to be agreed when the contract is made-

(a) if it is left to be determined by reference to the price at which a contract is to be entered into on a market or exchange or could be entered into at a time and place specified in the contract, and

(b) in a case where the contract is expressed to be by reference to a standard lot and quality, even if provision is made for a variation in the price to take account of any variation in quantity or quality on delivery.

(4) For the purposes of subsection (1)(g) a contract similar to a contract for differences is a contract-

(a) which is not a contract for differences, but

(b) the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in the value or price of property or an index or other factor designated in the contract.

(5) The following are not "securities" for the purposes of this Chapter or Chapters 2 to 5-

(a) cheques and other Acts of exchange, bankers' drafts and letters of credit (other than Acts of exchange accepted by a banker),

(b) money and statements showing balances on a current, deposit or savings account,

(c) leases and other dispositions of property and heritable securities,

(d) rights under contracts of insurance (within the meaning of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001), and

(e) options.

(6) The Treasury may by order amend subsections (1) to (5).

(7) An order under subsection (6) may include any appropriate consequential provision (including provision amending any enactment).

(8) In this Chapter and Chapters 2 to 5-

"interest", in relation to securities (or shares), means an interest in them less than full beneficial ownership and includes an interest in proceeds of their sale, but does not include a right to acquire them,

"securities option" means a right to acquire securities, and

"shares" includes stock.

ANNEX B

Overview of National Insurance Contributions ³

³ Amounts and rates are for the 2004/5 tax year

There are six classes of contributions.

• Class 1 contributions which are paid by both employees and employers on the employee's earnings - the employee's share is known as the primary contribution, the employer's as the secondary contribution. Class 1 contributions are payable on all gross earnings including commissions and bonuses, on readily convertible assets given to employees and on employees' liabilities paid by employers. Primary contributions are payable at 11% of earnings above £91 up to £610 per week (£4,732 to £31,720 per year) and 1% of income above this limit. Secondary contributions are payable at 12.8% of all earnings above £91 per week. There are arrangements for reducing the rates of both primary and secondary contributions where the employee has contracted out of the State Second Pension. Class 1 contributions are normally collected monthly by the Inland Revenue along with PAYE income tax.

• Class 1A contributions are payable by employers on all taxable benefits in kind other than the provision of child care. Class 1A contributions are collected annually by the Inland Revenue.

• Class 1B contributions are payable annually by employers on non-cash items which are dealt with under a PAYE Settlement Agreement.

• Class 2 contributions are paid by the self-employed at a flat rate of £2.05 per week - a self-employed person can be exempted from liability where earnings are below £4,215 per year. Class 2 contributions are paid either monthly or quarterly.

• Class 3 contributions are paid on a voluntary basis by people who fall outside the scope of Class 1 and 2 contributions at a flat rate of £7.15 per week.

• Class 4 contributions are paid annually by the self-employed on Schedule D Case I or II profits at a rate of 8% on profits between £4,745 and £31,720 and 1% of profits above £31,720.

ANNEX C

Overview of Statutory Payments ⁴

⁴ Amounts are for the 2004/05 year

There are four Statutory Payments.

• Statutory Sick Pay (SSP) is paid to employees by their employer when the employee is incapable of work for four or more calendar days in a row. The employee does not need to provide the employer with medical evidence. There are some qualifying conditions the employee must satisfy. The main one is to have average weekly earnings of at least £79 in a period of at least 8 weeks before they became incapable of work. SSP is payable for a maximum of 28 weeks at £66.15 a week. If the employee is not entitled to SSP or they run out of their entitlement the employer must complete a form to enable the employee to claim Incapacity Benefit.

• Statutory Maternity Pay (SMP) is paid to pregnant employees by their employers when they satisfy the qualifying conditions. The employee must:

-     provide the employer with medical evidence of their pregnancy and the week the baby is due;

-     have worked for the employer continuously for 26 weeks up to and including the 15^th week before the week the baby is due;

-      have average weekly earnings of at least £79 in a period of at least 8 weeks up to and including the 15^th week before the week the baby is due; and

-     give their employer 28 days notice of when they want to take time off work.

SMP is payable at 2 rates. The first 6 weeks is paid at 90% of the average weekly earnings. The remaining 20 weeks are paid at the lower of £102.80 a week or 90% of the average weekly earnings. If the employee is not entitled to SMP the employer must complete a form to enable the employee to claim Maternity Allowance.

• Statutory Adoption Pay (SAP) is paid by employers to employees who are adopting a child on their own or to one member of a couple who are adopting a child together. The employee must:

-     provide the employer with evidence that they have been matched with a child for adoption;

-     have worked for the employer continuously for 26 weeks up to and including the week in which they are matched with a child for adoption;

-     have average weekly earnings of at least £79 in a period of at least 8 weeks up to and including the week in which they are matched with a child for adoption; and

-     give their employer 28 days notice of when they want to take time off work.

SAP is payable for 26 weeks at the lower of £102.80 a week or 90% of the average weekly earnings. There is no state benefit if the employee is not entitled to SAP.

• Statutory Paternity Pay (SPP) which is paid by employers to employees who satisfy the qualifying conditions and who are:

-     the baby's biological father; or

-     the partner or husband of the mother but not the baby's biological father, including a female partner in a same sex couple; or

-     the partner of someone adopting a child on their own; or adopting a child with their partner.

The employee must:

-     provide the employer with a declaration of family commitment;

-     have worked for the employer continuously for 26 weeks up to and including the 15^th week before the week the baby is due OR up to and including the week in which the adopter is matched with a child for adoption;

-     remain continuously employed until the baby is born or the child is placed for adoption (this means the child starts living permanently with the person who will be adopting them);

-     have average weekly earnings of at least £79 in a period of at least 8 weeks up to and including the week in which the baby is due OR the week in which the adopter is matched with a child for adoption; and

-     give their employer 28 days notice of when they want to take time off work.

SPP is payable for 1 or 2 whole weeks at the lower of £102.80 a week or 90% of the average weekly earnings. The employee may be entitled to Income Support if they are not entitled to SPP.

The Inland Revenue is responsible for providing employers with support to help them operate all four Statutory Payment schemes and also for ensuring that employees receive their correct entitlement.

ANNEX D

Glossary of abbreviations